Conflicting interests inherent in any supervisory relationship (agency theory)

No manager can control an independent contractor (law firm lawyer, temporary hire, consultant, vendor) as well as an employee. Each external worker has interests that diverge from the manager’s to some degree. Even employees pursue their own interests. With both external hires and internal hires, the ever-present risks and how to mitigate them are the topic of agency theory (See my post of July 14, 2006: adverse selection; Aug. 13, 2006: moral hazard; Jan. 16, 2006: risk aversion and the principle-agent problem; Jan. 28, 2007: agency theory doesn’t translate from economics to law departments; Jan. 1, 2008: elements of agency theory that shed light on law department management; Jan. 1, 2008: agency theory part II: adverse selection; and Feb. 9, 2008: adverse selection.).

Almost always, a conflict of interest between a law firm and a client implicates agency theory (See my post of April 20, 2008: conflicts of interest with 24 references.).

The theory applies to many aspects of legal department management and economics. Various means are available to try to align the interests of the agent with those of the law department (and company), such as fee arrangements, bonuses, performance measurement, information reporting, procedures, and fear of firing.

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